January 20, 2019

Colorado Court of Appeals: City Improperly Imposed Use Tax on Purchases from Wholesalers that were Later Sold at Retail

The Colorado Court of Appeals issued its opinion in Big Sur Waterbeds, Inc. v. City of Lakewood on Thursday, October 4, 2018.

Sales and Use TaxDisplayed Furniture—Primary Purpose of Purchase.

The City of Lakewood (Lakewood) imposes use tax on tangible personal property purchased at retail and used in the city. The use tax does not apply to wholesale purchases (i.e., purchases for resale to others). Big Sur Waterbeds, Inc., Denver Mattress Co., LLC, and Sofa Mart, LLC (collectively, plaintiffs) purchase furniture tax-free from wholesalers worldwide and resell it in stores, including in Lakewood. At each Lakewood store, plaintiffs provide a showroom where they display furniture for customers to peruse and try out. Plaintiffs also maintain warehouses where they store the bulk of their inventory. Plaintiffs ultimately sell all the furniture, including the displayed furniture, and fill customer orders from either the warehouses or the showrooms. Plaintiffs’ customers pay Lakewood’s sales tax on each purchase.

Lakewood assessed use tax on plaintiffs’ purchases of displayed furniture from 2012 to 2015, on the theory that plaintiffs purchased the displayed furniture at retail for their own use in advertising their products. Plaintiffs challenged the assessments in the district court, which entered judgment in their favor.

On appeal, Lakewood contended that while plaintiffs’ inventory purchases were initially treated as exempt wholesale purchases, when a portion of this wholesale inventory was withdrawn for use as demonstration and promotion tools, the transactions were properly recharacterized as taxable retail transactions. Lakewood relied on its Initial Use Regulation and regulation 3.01.300(1)(b), pertaining to initial use of property, which focus on the primary purpose of the purchase. The court of appeals employed the “primary purpose” test from A.B. Hirschfeld Press, Inc. v. City and County of Denver, 806 P.2d 917, 918–26 (Colo. 1991), and determined that the totality of plaintiffs’ conduct indicates that they purchased the displayed furniture primarily for resale in an unaltered condition and basically unused. Because plaintiffs purchased the displayed furniture primarily for resale, not for their own use or consumption, the Initial Use Regulation does not apply. Similarly, regulation 3.01.300(1)(b), which pertains to tax-free purchases for resale that are later removed from inventory for the purchaser’s own use, does not apply because the displayed furniture was always available for resale and eventually sold. Therefore, Lakewood’s use tax does not apply to the retailers’ purchases and minor use of the furniture for display.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: Taxes Paid to Wrong Municipality Cannot be Recovered and Are Still Owed to Correct Municipality

The Colorado Court of Appeals issued its opinion in Qwest Corporation v. City of Northglenn on Thursday, April 24, 2014.

Use Taxes—Statute of Limitations—CRS § 39-26-210.

Qwest Corporation has a facility in Thornton, a home-rule municipality. Under Thornton’s tax code, Qwest must pay use taxes on new purchases delivered to the Thornton facility. Northglenn, an adjacent home rule municipality, has a similar tax ordinance.

Qwest’s Thornton facility is across the street from Northglenn. Between 2002 and 2005, an error in Qwest’s computer software recognized the Thornton facility as being in Northglenn. As a result, Qwest mistakenly paid to Northglenn use taxes it owed to Thornton during that time.

In 2008, Thornton conducted an audit of Qwest and discovered the error. After Thornton notified Qwest of the deficiency, Thornton and Qwest entered into numerous agreements extending the three-year limitations period under CRS § 39-26-210 for collecting tax assessments and requesting refunds applicable to Qwest’s tax liability to Thornton. Thornton ultimately issued Qwest a sales and use tax assessment totaling $65,862.19 for the subject period.

In 2010, pursuant to CRS § 29-2-106.1(3), Qwest requested a hearing concerning the deficiency by the Colorado Department of Revenue (Department) and joined Northglenn as a respondent. This was the first time that Qwest notified Northglenn that it had received tax payments in error. The Department concluded that any action against Northglenn for taxes for the 2002 through 2005 period was time barred, and Qwest remained liable to Thornton.

Qwest appealed to the district court and moved for summary judgment. The district court affirmed the Department.

On appeal, Qwest argued that under CRS § 29-2-106.1(5) and (6), it is immune from liability for use taxes owed to Thornton for 2002 to 2005 because it erroneously paid those taxes to Northglenn. It further argued that the statute of limitations did not relieve Northglenn of any obligation to forward the erroneously paid taxes to Thornton. The Court of Appeals disagreed.

Colorado’s general use tax statute limits the time to collect taxes to three years after the date the tax is due. The parties agreed that if the limitations period applies, it has expired. The Court concluded that it clearly applies because it covers “any action to collect use taxes.”

Qwest also argued that it should be relieved of its tax liability to Thornton because it paid the amounts due to Northglenn. The Court rejected this argument because Thornton cannot recover the money from Northglenn due to the statute of limitations. The Court therefore affirmed the district court’s decision that Qwest remains liable to Thornton for the use tax deficiency.

Summary and full case available here.